DRAFT OF THE FEDERAL MINISTRY OF FINANCE
The draft of the Act on the Modernisation of the Deduction Tax Relief and Certification of Capital Gains Tax - the so-called Deduction Tax Relief Modernisation Act (AbzStEntModG) - submitted on 20 November 2020 primarily concerns the implementation of the deduction and refund procedure for taxes withheld at source and is intended to prevent possible fraud and tax evasion tactics at an early stage. Furthermore, the rules on limited tax liability for the transfer of rights entered in a domestic register will be adapted and anti-treaty-shopping-regulations will be introduced in the context of new EU requirements. In addition to the subject-matter of the title, the draft law also provides for changes to the German Reorganisation Tax Act and the German Fiscal Code.
WITHHOLDING TAX: REVISION OF THE RELIEF SCHEMES FOR FOREIGN TAXPAYERS
The legislator intends to remove the basis for commercial fraud models which lead to an abstractly existing risk of double refunds (cum/ex or cum/cum arrangements), particularly in the case of refunds of capital gains tax. To this effect, extended electronic reporting obligations of those obliged to deduct capital gains tax are to be introduced towards the tax authorities - centralised at the Federal Central Tax Office (Bundeszentralamt für Steuern) - for both limited and unlimited taxable persons. In particular, these include supplementary information on tax certificates for persons with unlimited tax liability, data on uncertificated capital gains tax, data on exemptions from tax deduction and consolidated data on tax deduction. In the framework of the accompanying simplifications resulting from the reduction of the existing relief procedures, both the optional control notification procedure - currently regulated in § 50d (5) and (6) EStG - and the previous option contained in § 50d (2) EStG between refunding and amending the tax notification by means of retroactive exemption certificates are to be deleted. Beginning in 2024, the Federal Central Tax Office is scheduled to process applications in a fully digitalised form.
TRANSFER OF RIGHTS: NO LIMITED TAX LIABILITY FOR DOMESTIC REGISTRATION
A limited tax liability may arise from the transfer or sale of a right (e.g. patents) which is entered in a domestic public register or which is applied in Germany. According to the draft law, taxation in this respect would be limited to cases with a substantial domestic element and would be based exclusively on domestic use of the rights concerned. Contrary to a letter from the Federal Ministry of Finance dated 6 November 2020, the explanatory memorandum to the Act states the cases of mere entry in a domestic register ultimately contravene the spirit and purpose of the law.
COMBATING ABUSE: ANTI-TREATY SHOPPING
The anti-abuse provision in § 50d (3) EStG is to be comprehensively revised and adapted to the requirements of Union law and international tax law. It is basically a relief scheme for foreign companies. However, if a foreign company is to be interposed with the sole aim of obtaining unwarranted benefits under the agreement in the form of relief from capital gains tax and from the deduction of tax, these benefits are not to be granted.
The conditions for entitlement to personal and material relief are now to be tightened. Under the new rules, a foreign company will not be entitled to withholding tax relief in future, irrespective of existing DBA provisions,
- insofar as persons are involved in it who would not be entitled to this claim if they did not earn the income directly (so-called personal entitlement to relief) and
- if the source of income has no material connection with an economic activity of this foreign company (so-called factual entitlement to relief).
Corresponding exceptions to this rule - i.e. the relief is granted - exist if it can be demonstrated that the involvement of the foreign company is not primarily a tax advantage. Up to this point, it was enough that there were no economic or other significant reasons for the intermediary.
A new Section 2 (5) is to be included in the German Reorganisation Tax Act, which provides for a ban on offsetting losses from certain types of abusive tax structuring arrangements. In procedural terms, an amendment to § 251 (2) sentence 2 AO on the enforcement of administrative acts is proposed and a newly inserted § 88c AO suggests a legal basis for the exchange of information between the tax authorities on capital market-related arrangements.
ENTRY INTO FORCE
Subject to specific rules of application in the individual tax laws, the Act should enter into force on the day following its publication.
It remains to be seen whether and to what extent changes to the submitted draft law will be made during the legislative procedure, considering the corresponding consultations in the Federal Parliament and Federal Council.